Achieving a fiscal miracle

The Union government’s net tax revenue for the full year of 2018-19 is now estimated at Rs 13.17 trillion, according to the latest numbers released by the Controller General of Accounts (CGA). This represents a shortfall of Rs 1.67 trillion over the revised estimates presented just four months ago in the government’s interim Budget presented to Parliament. This is a huge shortfall equivalent to about 0.9 per cent of India’s gross domestic product (GDP). And yet, the government has managed to keep the fiscal deficit for 2018-19 within 3.4 per cent of GDP, the revised estimates figure mentioned in the interim Budget. How did the government achieve this miracle? 

The figures released by the CGA provide some explanation. The government managed to recover more by way of loan repayments and increase its disinvestment receipts over and above what was mentioned in the revised estimates. Thus, total non-debt capital receipts for the government during 2018-19 came to about Rs 1.03 trillion, instead of Rs 0.93 trillion given in the revised estimates. That reduced the tax revenue shortfall by Rs 10,000 crore. A small increase of Rs 1,000 crore in non-tax revenue brought down the shortfall in total revenues to Rs 1.56 trillion. 

The remaining task of reducing the shortfall was still huge. So, the government began axing its expenditure. First, it began with squeezing the capital expenditure — by around Rs 13,000 crore. The shortfall was reduced to Rs 1.43 trillion. And then the government sought recourse to what is popularly called off-Budget borrowings or transferring its own expenditure to state-owned entities and asking them to borrow from various sources including the National Small Savings Fund and meet the expenditure that actually should have been incurred by the exchequer. As explained by Prasanta Sahu in Financial Express, the government leaned on state-owned organisations such as the Food Corporation of India (FCI), Housing and Urban Development Corporation (Hudco), National Housing Bank (NHB), National Bank for Agriculture and Rural Development (Nabard) and Rural Electrification Corporation (REC) for such off-Budget borrowings to meet its expenditure on account of food subsidies, affordable housing schemes, irrigation, rural housing and rural electrification. And the amount of such off-Budget borrowing was as huge as Rs 1.32 trillion.

The CGA figures do not refer to off-Budget borrowings but provide an indication of such clever expenditure management tactics. For instance, the government’s food subsidies bill for 2018-19 is now estimated at Rs 1.02 trillion, a reduction of over Rs 69,000 crore compared to the revised estimates of Rs 1.71 trillion, mentioned in the interim Budget. How did the government cut its food subsidies bill by 40 per cent? Well, by simply asking the FCI to borrow and meet the expenditure. Similarly, expenditure compression of another  Rs 63,000 crore was achieved by transferring the load of various schemes for housing, irrigation and rural electrification to other entities like Nabard, Hudco, NHB and REC. 

The shortfall was now reduced to only Rs 11,000 crore. Thus, the government’s borrowing requirement or the fiscal deficit went up from Rs 6.34 trillion to Rs 6.45 trillion. But this slippage was hardly a problem. The nominal size of GDP for 2018-19 had been revised upwards from Rs 188.41 trillion to Rs 190.1 trillion. The expanded GDP base helped retain the gross fiscal deficit at 3.4 per cent of GDP. 

Though the fiscal deficit target in the revised estimates for 2018-19 was met, the manner in which it was achieved raised a few disturbing questions. One, why was the finance ministry so wide of the mark in projecting its tax revenue numbers for 2018-19? To have got its revised estimates on tax revenues completely wrong, resulting in a slippage of 11 per cent, is nothing but a shame. 

The advancement of the Budget presentation by about four weeks may have speeded up the rollout of expenditure on various schemes right from the start of the new year, but the government’s ability to estimate its tax revenues for the full year has suffered hugely. The damage it does to the credibility and achievability of revenue targets for the next year is even worse. 

For instance, with a 11 per cent drop in its actual net tax revenues compared to the revised estimates for 2018-19, the task of achieving the targets for 2019-20 will become even more formidable. Instead of a growth rate of 15 per cent, the required growth rate now will be steeper at 29 per cent. The challenge of fiscal consolidation in 2019-20 thus is already very daunting. 

A related question pertains to how the borrowings of the state-owned entities would be settled and how these would be treated in the accounts of the following years. These borrowings by public sector entities should strictly reflect in the government’s account. For instance, the government’s actual fiscal deficit would have ballooned to 4.1 per cent of GDP if it had itself made the borrowings. 

Burdening the public sector with the government’s borrowings is a travesty of the government’s stated commitment to the goals of public sector autonomy and reforms. Such recourse to off-Budget borrowings also underlines the need for maintaining a stricter vigil on overall public sector borrowing of the government in order to gauge its actual fiscal consolidation efforts.

Worse is the recent move by the Reserve Bank of India to exempt public sector entities from single-account exposure limits for banks. This will allow public sector companies to borrow from banks without worrying about the single-account exposure limit of 20 per cent of the bank’s available eligible capital base at all times. Is this relaxation aimed at allowing public sector entities to borrow freely from banks to meet expenditure that should ideally have been borne by the exchequer? 

Finally, such off-Budget borrowings provide additional relief to the government by helping the economy achieve a better economic growth number. If the government had indeed cut its expenditure by Rs 1.45 trillion in the last quarter of 2018-19, this squeeze would have reflected in the government consumption numbers in last year’s fourth-quarter GDP estimate. 

True, the capex cut of Rs 13,000 crore was real. But the remaining cut of Rs 1.32 trillion was not real — this expenditure burden was shifted to public sector entities through their borrowings. Unsurprisingly, government consumption grew by over 13 per cent in the last quarter of 2018-19. If the government had really cut its expenditure, government consumption growth would not have been so high and the January-March 2019 GDP growth numbers could have been lower than 5.8 per cent.

Without doubt, the miracle of achieving the fiscal deficit target in 2018-19 has many features that are deeply troubling.

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